Are M&A rules for telecom a catalyst for consolidation?

Will telecom sector see increased M&A activities with eventually fewer players being left out in this fiercely competitive sector? Only time will tell but it doesn’t seem that the number of telecom operators operating in India will come down from double digits to a single digit in the immediate future as a result of consolidations pursuant to the new M&A rules for the telecom industry recently approved by group of ministers. The mood of the industry though is upbeat as the new M&A rules were much awaited in this sector suffering from price war and cut throat competition. Whether big operators will acquire the smaller ones to consolidate or the smaller operators will see consolidations among themselves will be best answered in the time to come.

The group of ministers approved the cap on market share (in revenue as well as user base) of the merged entities in a circle to 50 per cent from the earlier limit of 35 per cent. The merged entity which breaches this limit of 50 per cent will have to bring it back to 50 per cent within a year’s time. This would give an additional flexibility of 15 per cent to acquire other telcos. It is evidently clear that consolidation among the top telecom operators is completely ruled out in those circles where the cap of 50 per cent will be breached upon merger unless the operators are willing to bring the post merger combined share within the permitted cap in a year. However, there will be ample leeway for bigger operators to merge the smaller (regional) operators or even smaller operators merging their operations. Thus, the relaxed rules may pave way for consolidation which was being prevented owing to the existing rules.

It has also been decided to permit the combined entity to hold two blocks of 3G and broadband wireless access spectrum, increasing it from one block each as currently permitted. Further, the spectrum cap of a merged entity is capped at 25 per cent of total airwaves assigned for access services and 50 per cent of the bandwidth assigned in a service area.

However, no proposal has been made on the issue of three years lock in period before the equity in the licence holder company can be sold and the issue whether the telecom operator can merge within three years is under consultation. Interestingly, a merger does not really result in an outright sale of equity in the company; it rather results in consolidation and equity dilution.

If an incumbent operator were to acquire another incumbent operator, the acquirer will not have to pay for the spectrum as it had got in its licence agreement and will only have to shell out the market price for the spectrum being acquired. However, should a new operator which bought spectrum through auction decide to acquire an incumbent operator, the acquirer will have to pay market determined price for the spectrum held by the target operator.

The Indian telecom industry which is reeling under intense competition may welcome these rules but it is unlikely to immediately catalyse consolidation though it could be a reality in the near future.

(The author is a partner with J Sagar Associates. Views are personal).

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